What is Goal-Based Investing? A Guide to Wealth with Purpose

2024-08-02

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Under normal circumstances, almost everyone has financial goals. For example, buying a car, owning a house, paying for a child’s higher education, retirement, going on an international vacation, and so on.

You may have a goal to have enough income to live off your retirement years or buy a holiday home after you retire and spend your time there.

Goal-based investing is a process where your goals are an inseparable part of your investment strategy. In goal-based investing, your goal is of prime importance. Your investment goals will help you decide:

When to invest?
Where to invest?
How much to invest?
When to withdraw?
How much to withdraw?

Goal-based investing puts you in a driver's seat as you are actively involved in the decision-making process. Your success depends on whether you are on track to achieve your goals. You are not competing with anyone in the journey.

First, you create goals and then select investment options that will help you achieve your goals.

How to Identify your Investment Goals?

Everyone's situation is different when it comes to personal finance and goal-based investing. Hence, you need to identify your goals and accordingly invest to achieve them. Your financial goals must be specific, measurable, and time-oriented. You can identify your investment goals using the below criteria:

a) Short-Term Goals:

You can put all the goals you need to complete within three years under short-term goals. It can include goals like going on a vacation, buying a new car, home upgrade, etc.

b) Long-Term Goals:

Identify goals you need to achieve after three or more years. These goals will include a child's higher education, marriage, retirement, buying a house, etc.

c) Need-Based Goals:

Need-based goals are usually related to your household and lifestyle expenses. For example, home renovation, maintenance, car repair, child’s school fee, etc. Financial protection goals will also fall into this category.

The majority of your investments must fulfil these three categories of goals.

Finding Best Investment Options for your Financial Goals

Once you know your goals, you have to look for the best investment option to help you achieve your goals. Every investment option has a risk associated with it, and you must understand it. Below are some of the best investment options. You can invest in them depending on your goals:

Short-Term Goals	Long-Term Goals	Need-Based Goals
- Bank & post office fixed deposits	- Equity mutual funds	- Super savers deposits
- Recurring deposits	- Equity Linked Savings Scheme (ELSS)	- Liquid mutual funds
- Debt mutual funds	- Unit Linked Insurance Plans (ULIPs)	- Term insurance
- Liquid mutual funds	- Guaranteed Saving Plans	- Health insurance
	- Public Provident Fund (PPF)	- Accidental insurance
	- National Pension Scheme (NPS)
	- Direct stocks & bonds

Taxation should be one of your criteria before selecting an investment option. If you have to pay high tax on your returns, your net gain is lower. For example, when you have a profit on your mutual fund investment, you need to pay taxes on the profit amount. These taxes are known as capital gain taxes. If your profit was Rs 10 lakh and capital gain tax was 20%, your net gain is only Rs 8 lakh.

Hence, you should know the taxation on every investment you are making. You should select an investment option that reduces your tax liability and also help you earn tax-free income.

Identifying all your financial needs gives you a clear picture of your finances. Goal-based investing helps you answer crucial questions like why to invest, how much to invest, and where to invest. More importantly, it gives you a purpose to stay invested. When you stay invested, you maximize your wealth through the power of compounding.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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